The state’s deficit problem is political, not technical

This week’s conference on the state’s budget crisis—sponsored by the Empire Center on State Policy and the Center for Governmental Research Inc.—was organized around a technical question: What can be cut from New York’s budget to fix a deficit estimated (today, at least) at $12.5 billion? Yet the overriding problem is not technical but political. My colleague Erika Rosenberg, moderator of one of the sessions, asked the panelists this question: “What’s it going to take for the Legislature to make the unpopular decisions that are needed to balance the budget?”

Gov. David Paterson made the correct technical decision in calling the Legislature back for a special session on Nov. 18. Yet the brutal reality of New York politics eliminated any possibility of progress. With control of the state Senate still in question and the political risks starkly clear, the session never convened.

Estimated at a cumulative $30 billion through fiscal year 2010-11, the deficit is only partly about the faltering economy. E.J. McMahon, the architect of the conference and capable leader of the Empire Center on State Policy, pointed out a critical fact: Less than half of the deficit is the result of falling revenues. McMahon cited the Division of the Budget’s finding that 54 percent of the 2009-10 deficit is the result of planned increases in spending for programs like Medicaid, school aid and negotiated salary increases for state workers. Expected Medicaid growth is $1.8 billion. School aid growth is projected at $2.2 billion. In recent years, such rapid increases in spending have been affordable in New York only because the economy—particularly the Wall Street portion of it—has been so robust. Falling revenue has revealed just how much growth was already wired into the budget.

The revenue situation has only gotten worse since the failed special session. Despite a reasonable expectation that the natural forces of recovery will begin to buoy the national economy by the second half of next year’s budget, revenue to fund programs in 2009-10 is heavily dependent on calendar year 2008 incomes. Moreover, many believe that a recovery in New York will lag a national recovery.

Of greater long-term concern, the New York City financial sector has been fundamentally changed by the crisis and may never regain its former luster. Kathryn Wylde, president of the Partnership for New York City, reviewed the cataclysmic events rocking Wall Street, reminding conference participants both of the firms that have disappeared and of the firms that now report to headquarters located in other states.

The conference focused on ways to spend less. Education and Medicaid take top billing in these discussions—in rough terms, each consumes one-third of the budget.

Medicaid was the subject of its own panel. The solutions to the ever-expanding Medicaid burden are conceptually simple. Yet Medicaid pays for services to residents and provides income to health care providers. Of course, most beneficiaries (both recipients and providers) live in New York. And they vote. And both groups oppose spending reductions.

A disproportionate share of Medicaid funding goes to the elderly (for long-term care) and the disabled. As Kathy Kuhmerker, former state Medicaid director noted, these groups comprise 20 percent of recipients but receive 75 percent of the dollars. These are expensive groups to serve throughout the nation, but the problem is certainly more severe in New York. The cost per elderly recipient here is 79 percent above the national average. The average disabled recipient gets 92 percent more. The political dynamic supporting continued funding to both groups is very powerful.

Moreover, health care is a large and growing industry. In 2007 there were nearly 1.1 million jobs in health care across the state, 28 percent more than in 1990. Total jobs in the state grew only 5 percent in the same period. Wages in health care totaled $50 billion in 2007, just under 5 percent of the state total.

A similar dynamic plays out for school aid. Tom Rogers of the New York State Council of School Superintendents notes that real cuts will be controversial. While everyone can support the idea of saving money through consolidation (of someone else’s district), most of the money is in instruction. Only 2.2 percent of spending is for administration.

The cost of special education is a particular problem. New York is second in the nation in special education salaries as a share of total instructional salaries and third in special education staffing ratios.

Conference participants heard many ways to trim the state’s budget. (Summaries of the presentations will be posted at www.cgr.org and www.empirecenter.org.) Yet the fundamental challenge remains political. Cutting the budget is not bloodless. Major reductions in spending can only be achieved by cutting services.

Will state lawmakers have the courage and wisdom to balance the short-term and long-term needs of the state, while ensuring that they do not further erode New York’s competitiveness? Any pain inflicted through the budget can—and will—be the subject of legislative campaign ads two years hence. May Paterson be granted the wisdom of Solomon, the strategic vision of Napoleon and the craftiness of Machiavelli. He’ll need all three if he’s to drive a bargain that preserves long-run economic stability and meets the needs of New York’s diverse population.

Kent Gardner, Ph.D. President & Chief Economist
Published in the Rochester (NY) Business Journal December 12, 2008